High-income taxpayers in Massachusetts who have the flexibility to move out of state would have "substantial incentive" to do so if an income surtax is approved, taking their wealth and major tax contributions with them and causing the so-called millionaire's tax to backfire on proponents, according to a new analysis.
The Massachusetts Taxpayers Foundation analysis, released two days before lawmakers are expected to vote to place a constitutional amendment on the 2018 ballot, lays out a case against the proposal, which proponents say will force households with incomes above $1 million a year to pay their "fair share."
The tax burden of those targeted by the plan would grow from 21 percent to 29 percent of total annual income taxes, and affected taxpayers may respond with their feet, the report says. Calling it a "serious threat to the fiscal stability and economic well-being of the Commonwealth," the analysis predicts the surtax will lead to "confusion and litigation" and undercut efforts to attract capital. The taxpayers foundation's members include many large businesses.
"The millionaire's tax does not align with the state's economic interests because it taxes talent - Massachusetts' principal competitive advantage," the analysis says. "The appeal is easy to understand - it is projected to raise almost $2 billion per year; does not require legislators to take a vote on a tax increase; and targets a small number of wealthy taxpayers. But as the old adage suggests, if it sounds too good to be true, it probably is."
In May 2016, Democrats in the Legislature voted overwhelmingly, 135-57, to advance the citiziens petition, with proponents arguing state government needs a revenue infusion to afford overdue investments in education and transportation. If adopted, the state would move away from its uniform income tax rate — currently 5.1 percent — to a system featuring two different rates, depending on income.
Wednesday's expected vote is scheduled just days after Standard & Poor's Global Ratings downgraded its rating of the state's creditworthiness and as Gov. Charlie Baker and Democratic legislative leaders struggle with major budget difficulties stemming from weak growth in overall state tax collections.
Among other things, the analysis predicts budgeting realities on Beacon Hill will prompt lawmakers to take steps to use revenues from the tax increase to plug budget holes rather than dedicating new revenues to transportation and education, as the amendment is designed to do. And the analysis claims budget problems will likely worsen, if there is an outward migration of high-income taxpayers, because many of the same people who will be hit with the 4 percent income surtax account also pay large amounts in capital gains taxes.
The analysis says that 19,600 tax filers would be affected by the tax increase, including 900 who are projected to make more than $10 million annually and would contribute 53 percent of new tax revenues, or over $1 billion of the additional $1.9 billion projected from the surtax. The top 100 earners in the state would see their income taxes rise from an average of $5 million to $9.3 million annually.
"If one-third of the 900 tax-filers projected to make more than $10 million annually were to relocate, total income tax revenues would drop by approximately $750 million ($410 million in taxes from the current rate and $335 million in projected taxes from the 4 percent rate hike ... " the analysis said. "Since over 80 percent of income for this group derives from capital gains, Schedule E earnings, and interest — with just 15 percent coming from wages — most taxpayers would have the motivation and flexibility to avoid the additional tax burden."
The report faults the state's official estimate that the new tax could yield $1.6 billion to $2.2 billion a year because it is based on a "static" analysis, "meaning it does not consider or factor in the affected taxpayers' change in behavior as a result of this tax increase or the impact on the larger economy."
Another big knock on the surtax, according to the analysis, is that it would take too long — several years at a minimum — to change the policy if it fails to live up to the claims of its supporters or if it backfires in the ways predicted by the taxpayers foundation. Laws can be changed relatively quickly, if necessary, but the process required to amend the constitution is a long one.
The report is not silent on possible alternatives to the income surtax.
"The Legislature could make the state tax structure more progressive by statutorily raising the income tax rate and the amount of personal exemptions or by lowering the sales tax rate to reduce the burden on lower income earners," according to the analysis, which was distributed to lawmakers Monday morning. "These changes would make the state's tax code more progressive without putting the economy at risk and could be easily amended by the legislature as fiscal or economic changes dictate."
Rep. Jay Kaufman (D-Lexington), co-chair of the Legislature's Revenue Committee, said during the 2016 convention that the poorest Massachusetts households pay 11 percent of their income in state and local taxes, compared to about 9 percent of middle-income households, and less than 5 percent for households in the top 1 percent, as measured by income. "We have a classic regressive tax system," said Kaufman.